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Growing real estate liabilities

The consequences of new International Accounting Standards (“IFRS 16”) announced earlier this year (for
enactment in 2019) are being analysed and realised and seem set to impact significantly
on the way companies reflect real estate liabilities.

In essence the IFRS 16 Standard will require property liabilities
over the full lease term to be reflected on the tenant’s balance sheet
(akin to a finance lease).

Break options will not be recognised as a means to reduce
lease liabilities so that may give rise to occupiers seeking shorter leases
with an option to renew.

The long established trend over the past two decades to
shorter leases is already in conflict with the aim of many landlords for longer
term secure leases so market conditions will play a major part in determining
whose aims win out.

Leases with fixed or upward only rental uplifts may become
less attractive as compared to open market reviews but the property investment
bedrock of upward only reviews is in our view likely to hold sway. Serviced
offices with their short, flexible contracts may be increasingly sought.